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A special job for a customer require 8 tonnes of a material M. The company no longer uses this material regularly although it holds 3 tonnes in inventory. These originally costs $44 per tonne, and could be resold to a supplier for $35 per tonne. Alternatively these materials could be used to complete another job instead of using other materials that would cost $126 to purchase. The current price of Material M is $50 per tonne.
The company must decide whether to agree to the customer’s request for the work, and to set a price. What would be the relevant cost of Material M for this job.
Here is how I answered
Total cost =$355 (3*35)+(5*50).
This answer was different compared to mark scheme. According to them, this company needs to consider higher of $126 and (3*35) when calculating the relevant cost of the decision, therefore the final answer equals $376. This is BPP’s revision kit’s question 108 (Part C – Decision making techniques). I don’t understand why they consider a higher cost when accepting to work towards a customer request.
First you have to ask yourself what the company would do with the material if they did not do the special job.
They could either sell it and receive $35 per tonne (so a total of $105) or they could use it on the other job and save a total of $126.
They would prefer to use it on the other job and save $126.If instead they used it on this special job, they would not be able to save $126 and so this is the relevant cost of using it on the special job.
Given that this only related to the 3 tonnes in inventory, they other 5 tonnes needed will have to be purchased at the current price of $50 per tonne.
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